New Law Offers Special Tax Option for Philippines Relief Donations
Under special legislation enacted last week, taxpayers can choose to treat cash contributions made on or after March 26, 2014, and before midnight on Monday, April 14, 2014, as if made on Dec. 31, 2013. This special provision only applies to charitable cash contributions for the relief of victims of Typhoon Haiyan.
Eligible contributions can be claimed on either a 2013 or 2014 return, but not both. Contributions made after April 14, 2014, but before the end of this year can only be claimed on a 2014 return.
Contributions made by text message, check, credit card or debit card qualify for this special option. Donations charged to a credit card before midnight on April 14, 2014, are eligible contributions even if the credit card bill isn’t paid until after that date. Also, donations made by check are eligible if they are mailed by April 14.
The Philippines Charitable Giving Assistance Act, enacted March 25, 2014, does not apply to contributions of property. Gifts made directly to individual victims are not deductible.
This benefit is only available to an individual that itemize their deductions. The deduction is not available to those that claim the standard deduction.
Contributions must go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on IRS.gov under Exempt Organizations Select Check. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.
Contributions to foreign organizations generally are not deducted. IRS Publication 526, Charitable Contributions, provides information on making contributions to charities.
A record of the name of the charity, the date of the contribution and the amount of the contribution are required for any deductible contribution. Donations by text message, a telephone bill will meet the record keeping requirement. Donations of $250 or more, taxpayers must obtain a written acknowledgment by the charity.
IRS Reverses Long-Standing Position on One-Rollover-per-Year Rule
I discussed a Tax Court case, Bobrow v. Commissioner, in my February 25th blog, “Tax Court Says One Tax-Free Rollover per Year Means just That”. I mentioned that one tax-free rollover per IRA per year was permitted by an IRS publication and proposed regulations. The decision held that a taxpayer may make only one tax-free, 60-day rollover between IRAs within each 12-month period, regardless of how many IRAs an individual maintains.
IRS will not apply this new interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015.
Bobrow v. Commissioner
Mr. Bobrow (anecdotally, a tax lawyer) completed numerous rollovers from various IRAs within 60 days. This was consistent with IRS Publication 590 and the proposed regulations.
The Tax Court relied on its previous rulings, the language of the statute, and the legislative history in deciding this case. The Tax Court held that regardless of how many IRAs an individual maintains, a taxpayer may make only one nontaxable rollover within each 12-month period.
The IRS response
The IRS, in Announcement 2014-15, indicated that it will follow the Tax Court’s Bobrow decision, and apply the one-rollover-per-year rule on an aggregate basis, instead of separately to each IRA you own. However, in order to give IRA trustees and custodians time to make changes in their IRA rollover procedures and disclosure documents, the IRS will not apply this new interpretation to any rollover that involves an IRA distribution that occurs before January 1, 2015.
What this means to you
For the rest of 2014 the “old” one-rollover-per-year rule in IRS Publication 590 (see above) will apply to any IRA distributions you receive. So if you have a need to use 60-day rollovers to move funds between IRAs, you have only a limited time to do so without regard to the new Bobrow interpretation.
You can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. So if you don’t have a need to actually use the cash for some period of time, it’s generally safer to use the direct transfer approach, and avoid this potential problem altogether. The tax consequences of making a mistake can be significant, so don’t hesitate to consult a qualified professional before making multiple rollovers.
*Note: The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as rollovers for this purpose.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
What priority do you place on your retirement?
The New York Times Feb. 28, 2014 article, “Save for Retirement First, the Children’s Education Second”, applies to other financial goals also. Two critical financial planning steps are to identify your financial goals and determine the priority of each. The cost of each goal and when you want to achieve the goal are also needed.
One objective in financial planning is to determine how much is needed to achieve your goals. Saving is almost always the way to have the funds needed. The longer you wait to start to save for financial goals, the harder it is to achieve. That is because more needs to be saved each year.
The challenge to be able to save for retirement becomes more difficult as the number of goals increase. You can borrow for some goals. Borrowing for retirement is generally not an alternative. Financing goals before retirement may decrease the ability to borrow in the future and increases future cash needs.
Children’s education, helping a child with the purchase of a home, helping children with their loans could reduce the amounts needed to maintain a comfortable retirement.
Possibly the expenses can be reduced. Attending local and in-state colleges are generally less expensive than private colleges. Having the children take out student loans also reduces the amount the parents will have to pay.
Contributing less into qualified retirement plans, including IRAs, (Plans) and borrowing from Plans reduces the amount that can be saved for retirement. Contributing to Plans allows the funds to grow free of annual income tax. This allows the income and growth to grow faster in Plans. Borrowing from a Plan reduces the potential return on the amount in the Plan. If the interest rate charged by the Plan is less than the amount a financial institution would charge, the amount of income in the Plan will be reduced.
A reserve account for the unexpected and emergencies should be given a very high priority. Without reserves, these types of expenditures could require the liquidation of investment when their values are low.
There are unintended consequences of not saving for retirement first. Your children may need to support their parents in retirement. A child may need to give up a job to care for a parent if the funds are not available for health care.
Set your priorities for yourself first. Any excess can be left to your heirs.
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Tax Court Says One Tax-Free Rollover per Year Means Just That
| Background The Internal Revenue Code says that if you receive a distribution from an IRA, you can’t make a tax-free (60-day) rollover into another IRA if you’ve already completed a tax-free rollover within the previous 12 months. The long-standing position of the IRS, reflected in Publication 590 and proposed regulations, is that this rule applies separately to each IRA you own. Publication 590 provides the following example: “You have two traditional IRAs*, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.” Very clear. Clear, that is, until earlier this year, when the Tax Court considered the one-rollover-per-year-rule in the case of Bobrow v. Commissioner. Bobrow v. Commissioner On April 14, 2008, he withdrew $65,064 from IRA #1. On June 10, 2008, he repaid the full amount into IRA #1. On June 6, 2008, he withdrew $65,064 from IRA #2. On August 4, 2008, he repaid the full amount into IRA #2. Mr. Bobrow completed each rollover within 60 days. He made only one rollover from each IRA. So, according to Publication 590 and the proposed regulations, this should have been perfectly fine. However, the IRS served Mr. Bobrow with a tax deficiency notice, and the case went to the Tax Court. The IRS argued to the Court that Mr. Bobrow violated the one-rollover-per-year rule. The Tax Court agreed with the IRS, relying on its previous rulings, the language of the statute, and the legislative history. The Court held that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover within each 12-month period. “Taxpayers may rely on a proposed regulation, although they are not required to do so. Examiners, however, should follow proposed regulations, unless the proposed regulation is in conflict with an existing final or temporary regulation (Internal Revenue Manual 4.10.7 issue resolution). “IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position” (Internal Revenue Manual 4.10.7 issue resolution). This maybe why neither the IRS nor Mr. Bobrow appears to have cited the Service’s long-standing contrary position in Publication 590 and the proposed regulations. So what’s the rule now? And don’t forget–you can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. *The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as a rollover for this purpose.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources. |
Privacy Breaches
Two recent articles discuss privacy breaches.
“Sidestepping the Risk of a Privacy Breach”, posted by the nytimes.com February 7, 2014, discussed the security of personal data when using “plastic”. A representative of the American Bankers Association expressed concern that criminals seem to be ahead of the marketplace, the regulators and the consumers.
Starting in 2005, there have been 4.167 known breaches that exposed 663,587,386 records of personal information. Recent headlines have revealed continuing breaches at some very large and sophisticated entities.
Over 30% of people whose information was breached in 2013 became victims of some kind of identity theft. That is an increase from about 12% three years ago.
Emails are increasingly exposing us to the threat of breaches to our privacy. If you receive an email asking for personal information and there is anything that raises concern, go to the website and call the entity. If there is a known breach, it may be on the website or the representative of the entity can tell you if it is legitimate.
“Leading a cash-only life is a theoretical possibility, but it boxes you out of most online shopping and makes traveling difficult. Going cash-only mostly means endless trips to the A.T.M. and all the fees and hassle that come with it”.
“With the right tactics, however, it’s easy enough for most people to greatly bolster their odds of avoiding the worst of the problems.”
Gregory Karp’s article “Think before buying ID theft protection” was in The Chicago Tribune Feb. 9, 2014.
He believes that you probably should not subscribe to identify “protection” services, “if your only concern is a thief fraudulently using your payment card information. Typically, that’s not a big deal, and you won’t lose any money. ”
A representative from the Identity Theft Resource Center was quoted: “You can’t make the blanket statement that all of these services are bad or not worth your while.” A representative of the Privacy Rights Clearinghouse indicated the services have “dubious value. It’s fairly expensive, and there are other ways you can protect yourself.”
He noted that Consumer Reports had the following on their website: “Don’t get fleeced by identity-theft protections services.” Gregory noted that some felt the claim of “prevention” and “protection” are exaggerations. The benefit of these services is that they provide more timely alerts to a breach.
If you are thinking of getting this type of service learn exactly what you get. You need to educate yourself and follow through if you do not get this type of service.
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Rules Eased for Health FSAs
Recent changes announced by the Internal Revenue Service (IRS) modify the “use-it-or-lose-it” rule that applies to health flexible spending arrangements (FSAs). Plan sponsors will now have the option of allowing participants in health FSAs to carry over up to $500 of unused funds in a health FSA to the following plan year.
Background
Health FSAs are tax-advantaged employer-provided benefit plans that employees can use to pay for qualifying medical expenses. While generally funded through voluntary employee salary reductions, employers are able to contribute as well. Prior to the start of a plan year, employees decide how much to contribute to the health FSA (the maximum annual employee contribution to a health FSA that is part of a cafeteria plan is $2,500 for 2014). Contributions to the plan are excluded from income for federal income tax purposes, as are any reimbursements made from the plan for qualified medical expenses, including co-payments, deductibles, and dental and vision care expenses.
Any funds left unspent in the health FSA at the end of the plan year are forfeited–this is commonly referred to as the “use-it-or-lose-it” rule. Plan sponsors have the option of providing for a grace period of up to 2½ additional months after the end of the plan year (e.g., a calendar year plan might cover expenses incurred through March 15).
New rules
In Notice 2013-71, the IRS modified the “use-it-or-lose-it” rule that applies to health FSAs:
Plans may now be amended to allow participants to carry over up to $500 of unused health FSA funds at the end of a plan year.
Any carryover will not count against the $2,500 limit in the next plan year.
A plan may allow participants a grace period, as described above, or the ability to carry over unused funds–but not both.
A plan does not have to allow either the grace period or the carryover option.
To adopt the carryover option, plans must be amended on or before the last day of the plan year from which amounts may be carried over, and may be retroactive to the first day of the plan year, provided certain requirements, including participant notification, are met.
Special rules apply to plan years beginning in 2013–these plans may be amended to retroactively adopt the carryover provision at any time on or before the last day of the plan year that begins in 2014.
Word of caution
A health FSA plan can’t have both a grace period and a carryover option, so plans with existing grace periods will have to be amended to remove the grace period feature in order to add carryovers. Plan sponsors should consult carefully with a benefit specialist before taking any action, however, as eliminating an existing grace period feature raises potential issues relating to the Employee Retirement Income Security Act of 1974 (ERISA). IRS Notice 2013-71 itself states that “the ability to eliminate a grace period provision previously adopted for the plan year in which the amendment is adopted may be subject to non-Code legal constraints.”
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Reverse Mortgage Changes
Several changes have been made to the federally insured Home Equity Conversion Mortgage (HECM) reverse mortgage program to shore up the viability of the program. The changes are generally designed to improve the odds that homeowners taking out a reverse mortgage will be able to meet their obligations and not become a burden on the program. The changes are generally effective for new reverse mortgages after September 30, 2013 (but prior rules generally apply to case numbers assigned before September 30, 2013, if closed on or before December 31, 2013). Additional financial assessment and set-aside requirements take effect January 13, 2014.
Initial disbursements limited
One change generally restricts the amount that can be disbursed to you within one year of your obtaining the reverse mortgage. Under the new rules, the maximum amount that can be disbursed to you at closing or during the first 12-month disbursement period is equal to the greater of (a) 60% of the principal limit or (b) the sum of your mandatory obligations plus 10% of the principal limit (not to exceed 100% of the principal limit). Mandatory obligations include items such as the initial mortgage insurance premium, the loan origination fee, recording fees and taxes, credit reports, a survey, a title examination, title insurance, a property appraisal fee, fees for warranties or inspections, funds to pay any required repairs, and amounts used to discharge liens, debt, and taxes. Except in the case of a single disbursement lump-sum payment option, additional amounts can be disbursed in later years, up to 100% of the available principal limit.
New mortgage insurance premium rates
Another change increases the basic initial mortgage insurance premium, and applies an even higher rate if more than 60% of the principal limit can be disbursed to you in the first year. Under the new rules, an initial mortgage insurance premium fee of 0.5% of the maximum claim amount will generally be charged. The initial fee is increased to 2.5% of the maximum claim amount if required or available disbursements to you at closing or during the first 12-month disbursement period are greater than 60% of the principal amount. In either case, there is also an annual fee equal to 1.25% of the mortgage balance.
Financial assessment and set-asides
Finally, changes are made to improve the odds that you will be able to meet certain of your obligations under the reverse mortgage. For case numbers assigned on or after January 13, 2014, you must undergo a financial assessment prior to approval and closing on a reverse mortgage. Based on your assessment and as a condition of loan approval, you may be required to use proceeds from the reverse mortgage to fund a lifetime expectancy set-aside for payment of property charges or authorize the mortgagee to pay property charges from your monthly payments or your line of credit. Property charges include property taxes, hazard insurance, and flood insurance.
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New Mortgage Rules Scheduled to Take Effect in January
The Consumer Financial Protection Bureau (CFPB) has issued new mortgage rules that are scheduled to take effect on January 10, 2014.
In 2008, the rise in home foreclosures was viewed by many as the result of substandard mortgage lending practices. Subsequently, Congress passed the Dodd-Frank Act in 2010, which created the CFPB and set forth a number of financial industry regulations aimed at protecting consumers, including some pertaining to mortgage lending. In January 2013, the CFPB issued mortgage rules that implement the mortgage provisions set forth by Congress under the act.
Highlights of the new mortgage rules
The new rules broaden coverage of existing ability-to-repay rules, which require a lender to make a reasonable, good faith determination that a consumer has the ability to repay a loan. The rules extend coverage of the ability-to-repay rules to the majority of closed-end transactions secured by a dwelling (with certain exceptions).
In addition, the rules set forth specific procedures a lender must follow when determining a borrower’s ability to repay a loan, including the consideration and verification of certain consumer information (e.g., income, employment status) and the calculation of the borrower’s monthly mortgage payment.
The rules also center on what are referred to as Qualified Mortgages. According to the Dodd-Frank Act, lenders that issue Qualified Mortgages will receive a presumption of compliance with ability-to-repay rules, thereby reducing their risk of challenge from a borrower for failing to satisfy ability-to-repay requirements.
The rules specify various requirements that a loan must meet in order for it to be considered a Qualified Mortgage, including:
- Limits on risky loan features (e.g., negative amortization or interest-only loans)
- Cap on a lender’s points and fees (3% of the loan amount)
- Certain underwriting requirements (e.g., 43% monthly debt-to-income ratio loan limit)
What do the new rules mean for consumers?
The new mortgage rules were mainly put into place as a way to end irresponsible mortgage lending and ensure that borrowers will only be able to obtain a mortgage loan that they can afford to pay back. Proponents view the rules as welcome industry safeguards that simply mirror responsible mortgage lending practices that are already in place.
However, some mortgage-industry experts fear that the new rules may end up making obtaining a mortgage loan more difficult than it has been in the past–especially for borrowers who have a high debt-to-income ratio. Borrowers may also find themselves burdened with the task of providing lenders with additional documentation that they may not have had to in the past.
For more information on the new mortgage rules, you can visit the CFPB website at http://www.consumerfinance.gov/
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Grandfathered Plans: Can You Keep Your Current Insurance Plan?
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Tax and Planning Impact of Supreme Court’s Ruling in the Defense of Marriage Act (DOMA) Same-Sex Marriage Rights Case
Background
On June 26, 2013, the U.S. Supreme Court ruled on a landmark case related to same-sex marriage (SSM) (United States v. Windsor). The 5-4 decision changes the application of federal tax rules for married same-sex couples. Generally, the ruling should enable same-sex married couples to obtain the same treatment under federal rules as has been available to heterosexual married couples. Federal agencies are working on issuing guidance on the effect of the Windsor decision, including whether federal rules treat a couple as married based on the state of celebration (where the marriage was performed) or state of domicile (where the couple lives). In late August, the IRS released guidance stating that for federal tax purposes, a marriage is recognized if validly entered into in a domestic or foreign jurisdiction that has the legal authority to sanction marriages. Thus, for federal tax purposes, the IRS is following the state of celebration rule to determine if a couple is married. The Departments of Labor, Defense and Homeland Security have also adopted a state of celebration rule. However, it is important to realize that the Social Security Administration, by law, currently uses a state of domicile rule.
Same-sex couples who have not been legally married are unaffected by this ruling until their marital status is legally changed according to domestic or foreign country law.
This discussion will provide:
- An overview of the Supreme Court’s decision and what it may mean for you;
- Considerations with respect to estate, retirement, income tax, and health and welfare benefits plans; and
- Actions to consider with respect to long-term planning and tax return preparation.
Tax Implications
Federal tax treatment now available to legally married same-sex couples includes:
- Joint filing of federal income tax returns
- Amending of prior tax returns
- Pre-tax basis of employer-provided health-care benefits
- Deductible and includable alimony
- Income tax-free transfers between spouses
- Lifetime gift tax-free property transfers to spouses
- Estate tax relief for surviving spouses
- Spousal IRA contributions, rollovers, required minimum distributions
Filing of Tax Returns
Guidance from the IRS issued in August 2013 provides that any original return, amended return, claim for refund or credit, filed on or after September 16, 2013 by a same-sex married taxpayer must use a married filing status. So the married filing joint or married filing separately status, must be used for 2013 returns and beyond.
Amending of Tax Returns
Consideration should be given to amending federal income tax returns and gift and estate tax returns (for years that are still open under the tax law’s statute of limitations) to change marital and filing status and other information that will alter the tax calculations and potentially result in a lower tax liability. State tax implications also should be reviewed. Returns may be amended to correct filing status, dependents, income, deductions, or tax credits. Couples may want to estimate the income tax liability that would have been due in previous years if the couple had been able file a joint return. Even basic items are impacted, such as standard deductions, child-related tax credits, and phase-outs of certain benefits, such as the education expense deduction. Another example of a tax change is where one spouse could have had capital losses on investments in prior years that the other spouse’s gains would offset if they could have filed joint federal returns. However, the “marriage penalty” could be applicable for some couples and the married filing joint or married filing separate filing status may result in a higher tax liability, especially high-earning couples where both spouses are working. Each situation will need to be reviewed carefully. The guidance from the IRS does not require the filing of amended returns for 2012 and earlier years.
Excludable Employer-Provided Fringe Benefits
Employer-provided fringe benefits for the same-sex spouse of an employee will now be excludable from gross income. Employers should stop including this benefit in income as of September 16, 2013. The IRS issued guidance on September 23, 2013, on how employers can claim a refund of Social Security and Medicare taxes that they and the employee paid on these benefits for prior years, as well as amounts withheld during the current tax year.
Also, now that taxes should no longer be a factor, some couples may want to re-evaluate their health insurance choices. One spouse may now be able to move onto the other’s more generous plan, which may also be more affordable. You should check with your employer to see if perhaps an open enrollment period was created for this purpose.
Also, even if not changing health plans, you can file an amended return to obtain a refund of taxes you paid on those benefits in previous years that are still open for amending (generally returns filed within the last three years). We can discuss this option with you in more detail so you can see the tax effect of other changes that would occur on the amended return when you change your filing status.
Adoption Credit
Some couples will need to consider the impact of amending past returns on the adoption tax credit and whether the change in federal filing status will have an impact on the credit.
Deductible and Includable Alimony
Married same-sex couples who later divorce should be able to take a deduction for alimony, which would be includable in the income of the recipient. Previously married same-sex couples who are now divorced may be able to amend returns for the same reason.
Income Tax-Free Transfers of Property Between Spouses
Gain or loss should not be recognized on the transfer of property between same-sex spouses or between former spouses incident to a divorce. It remains unclear how previous transfers and the basis of those assets will be affected. The IRS may issue further guidance on this point.
Gift and Estate-Tax Free Transfers/Unlimited Marital Deduction
Married same-sex couples may claim the unlimited marital deduction for federal estate and gift tax purposes, allowing a spouse to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from gift and estate taxes. The unlimited marital deduction is considered an estate preservation tool because assets can be distributed to a surviving spouse without incurring estate or gift tax liabilities. Some couples that set up trusts to avoid double taxation on assets being passed along to their partners may find that a trust is no longer necessary now that assets can be passed directly to a spouse tax-free. Others may want to update their trusts to give their spouses tax-free access to the trust’s income or principal, an option this is now available to married same-sex couples.
In addition, married same-sex couples can now elect to split gifts in order to take advantage of doubled annual gift tax exclusion ($14,000 for 2013, for a total tax-free gift of $28,000). Married same-sex couples may also share assets without being subject to gift taxes. For example, prior to the ruling, couples that owned a house together but did not equally split mortgage payments and other expenses may have had those expenses covered by one spouse be subject to gift taxes if they exceeded $14,000 annually. Now that same-sex marriages are recognized for federal tax purposes, some married same-sex couples may feel more comfortable adding their spouse’s name to the property title, knowing that they have more flexibility on how they choose to split those expenses and with no gift tax implications.
Portability of Unused Estate Tax Exemption Amount
The American Taxpayer Relief Act of 2012 extended permanently the concept of portability, which generally allows the estate of a surviving spouse to utilize the unused portion of the estate tax applicable exclusion amount ($5.1 million in 2012, and $5.25 million in 2013) of his or her last predeceased spouse. Now, the surviving spouse of a married same-sex couple can take advantage of portability of the unused estate tax exemption amount of his or her deceased spouse.
Related Party Rules
Same-sex married couples who are now considered married for federal income and gift and estate purposes are subject to related party rules. This could impact the tax consequences of transactions between same-sex spouses. Prior to this ruling, married same-sex couples were treated for tax purposes as not related for certain transactions such as selling property between them and recognizing a loss. After this ruling, recognition of this same loss would not be allowed under the related party rules.
Spousal IRA Contributions, Rollovers, and Required Minimum Distribution
Married same-sex couples now have many more retirement plan options and issues to consider, including spousal IRAs, contributions, beneficiary designations, rollovers, and required minimum distribution (RMD) rules. Married same-sex couples with the only beneficiary a spouse who is more than 10 years younger can now use the joint table rather than the “uniform table” for distributions. A surviving spouse can now consider whether to make a spousal rollover of a deceased spouse’s IRA or 401(k). The IRS has promised further guidance regarding both prospective and retroactive changes to pension plans, IRAs and retirement distributions.
Other Federal Benefits
In addition, below are some of the federal benefits or protections that may now be available to legally married same-sex couples:
- Social Security, Medicare, and Medicaid benefits
- Certain veterans benefits, such as pensions and survivor’s benefits
- Military spousal benefits
- Family medical leave rights
- Spousal visas for foreign national spouses
- Private pension benefit options (e.g., survivor annuities)
- Application of the thresholds for the tax penalties and health insurance subsidies available under the Patient Protection and Affordable Care Act
Income and Estate and Gift Tax Planning Issues
Some of the specific individual income tax and estate and gift tax planning issues that may be impacted and should be considered are:
- Income Tax Planning Issues
- Joint tax returns
- Amended income tax returns
- Estimated tax payments for 2013
- Income tax returns beyond the statute of limitations
- Rollover IRAs at death
- Spousal IRA contributions and rollovers
- IRA required minimum distributions
- Review of the designated beneficiary on retirement and other benefits provided by an employer
- Divorce tax issues
- Application of the adoption tax credit
- Estate & Gift Tax Planning
- Updated estate plans and documents
- Inter vivos gifts
- Amended gift tax returns
- Gift and estate tax returns beyond the statute of limitations
- Portability of unused applicable lifetime exemption
- Grantor trusts
- Spousal rollover
- Beneficiary designations
- Retirement plans
- Community property rules
- Marital Agreements
Guidance From the Federal Government
The Supreme Court’s DOMA ruling generally means that married same-sex couples are entitled to the same federal benefits as heterosexual couples, but it does not necessarily make financial planning and tax compliance for married same-sex couples less complicated. Also, it may take time to fully implement the Supreme Court’s decision. Marriage is the “trigger” for more than 1,000 tax and benefit provisions in the Tax Code and other federal statutes.
Federal government agencies, including the Treasury Department and Internal Revenue Service, will continue to review and modify rules and regulations. Employers will need to review and revise their policies and procedures regarding benefits and withholding. Married same-sex couples will need to consider the new rules and policies, including their tax situation. Affected couples should consider updating their estate plans based upon the estate and gift tax impact, as well as their financial plans.
There may be some state tax issues to address as well. For example, federal employees may be entitled to certain benefits that others are not, and states likely will need to clarify what the state tax treatment is if the state does not recognize same-sex marriage. Also, for couples living in states that do not recognize same-sex marriage, the state will likely provide guidance on how to obtain the federal tax amounts to file state income tax returns.
It is expected that the IRS publications and website information that provide guidance to married individuals will be revised.
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